CASE: E-220

DATE: 05/03/06

FACEBOOK
I wake up and check my e-mail, then I go to Facebook. At night, I do the same thing. Facebook is
like an ice cream sundae because you can do anything with it, and no matter what, it's still fun.
1
Tiffany Chang, 17, student at University of California Davis

INTRODUCTION
In just over two years, Mark Zuckerberg had built the social directory Facebook from nothing
more than an idea into a national phenomenon worthy of a reported $750 million buyout offer. It
had become so vital to the university lifestyle that first-years were creating their Facebook
profiles long before they even set foot on campus.2 By the end of 2005, college students all over
the U.S. were spending countless hours every day on the addictive and rapidly growing website.
Nevertheless, other well-funded, so-called social networking sites had come and gone long
before Zuckerberg coded Facebook in his Harvard University dormitory. Was it just a fad that
would disappear from the collegiate landscape as quickly and as vigorously as it had consumed
it? Or would Facebook remain popular and overcome mounting competitive threats and intense
media scrutiny?
The organization had grown from just a few friends programming around a kitchen table to a
full-fledged technology business with over 100 employees and 7.5 million users. Zuckerberg
would have to develop an organization strategy that could allow the company to keep up with its
underlying growth metrics, while ensuring Facebooks user experience was better than its
alternatives. The companys core marketcollege studentswere prone to switching and
potential new marketscollege students outside of the U.S. and high school studentswere rife
with well-funded entrants that were a step ahead of Facebook. Focusing the organization on the
1

Matt Marshall and Anna Tong, Palo Alto, Calif.-based Facebook brings social networking online, San Jose
Mercury, August 29, 2005.
2
Fred Stutzman, Percent of Freshmen Who Use Facebook.com, eMarketer, January 2006.
Mike Harkey prepared this case under the supervision of Professor William P. Barnett, Thomas M. Siebel Professor
of Business Leadership, Strategy and Organizations, and Mark Leslie, Lecturer in Management, as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
This case was made possible by the generous support of Mr. James G. Shennan, Jr.
Copyright 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or
write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University,
Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or
otherwise without the permission of the Stanford Graduate School of Business.

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right objectives would be critical; getting the company to perform efficiently against those
objectives would be a challenge for Facebook CEO and 21-year-old Harvard drop-out Mark
Zuckerberg.
Founder
As an undergraduate at Harvard, psychology major Zuckerberg enjoyed building computer
software applications in his free time. He had been programming since he was 10 years old, and
his skills had, in his words, reached a point where it went into my intuition, and I wasnt really
thinking that much about it consciously.3 He added:
I made a ton of random things when I was at Harvard, and most of them no one
ever saw. A lot of them just werent meant for other people to see, and they were
just things that I made for myself because I thought that they would be cool. I
used to make stuff like a natural language interface to play my MP3s.
Nevertheless, his work had not always gone unnoticed. In his senior year at Exeter Academy,
Zuckerberg and his friend, Adam DAngelo, created a software plug-in called Synapse that
generated music playlists based on a users listening habits. Synapse soon found an audience
that stretched far beyond the boys prep school campus when the technology website
Slashdot.com carried a mention of the program. Shortly thereafter, Zuckerberg began fielding
buyout offers from a number of companies, including a $2 million bid from Microsoft. In
November 2003, he created facemash.com, a website that asked users to vote on the
attractiveness of Harvard students, pitting two students photos against each other at a time.
However, when reports of Zuckerbergs handiwork reached university officials, he was put on
probation and was asked to shut down his website. He obliged and by early 2004, he had moved
on to another idea, a facebook.
Facebooks
Facebooks have been on college campuses for generations. In the past, facebooks were paperbased student directories that were distributed to first-year student mailboxes in the fall. They
often contained an inventory of basic information about each newly matriculating student:
hometown, high school, major, extracurricular interests, and, naturally, a photograph, ranging
from formal high school graduation portraits to snapshots at the prom to action photos of
students engaging in a summer hobby of choice. Ask any student on any college campus if he or
she has finished Moby Dick, the Iliad, or Candide, and you might be surprised at the answer; ask
the same students if they have studied their schools facebook from A to Z, and you might be
even more surprised. Many had theirs committed to memory before the end of the first week of
school.
Part of facebooks enduring attraction can be explained by their merit-worthy functions. They
can be a helpful resource for a student who is, say, attempting to learn the name of the person in
3

Quotations from Mark Zuckerberg are taken from either his interview with venture capitalist Jim Breyer at a
Stanford Technology Ventures Program seminar on October 26, 2005, or his interview with the author on April 12,
2006, unless otherwise cited.

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astronomy class who has offered to start a study group, or for a student who wants to find
someone who would also like to mountain bike or join a book club. Indeed, the first few weeks
of college can be traumatizing for any student, and for decades facebooks have helped first-years
to bridge the gap between anonymity and familiarity.
Notwithstanding such honorable utilities, facebooks have achieved mass appeal because of their
purely social applications. Ask any college student why they have heavily dissected their
facebook, and you probably will not hear an explanation similar to those mentioned herein
(unless, of course, you are that students parent or teacher); what you will hear, however, will
probably have something to do with vanity and dating, i.e., college kids are very concerned with
how their facebook profile appears to others and with identifying potential romantic partners.
Located at the intersection of these two primal instincts, facebooks are as tethered to collegiate
life as final exams and spring break.
New Venture
For that reason, Zuckerberg could not understand why no one had thought to put his colleges
facebook online. He said, During my sophomore year, I decided that Harvard needed a
facebook. It didnt have one, so I made it. In January 2004, Harvard had facebooks for
different residential houses, but students could only search those to which they belonged.
Zuckerbergs idea was to create a college-wide facebook online, where students could access
others regardless of where they lived. In just a couple of weeks, Zuckerberg had coded the
original version of thefacebook.com and, on February 4, 2004, it was available for his classmates
to access. The site was later renamed facebook.com.
The response to Facebook at Harvard was huge and immediate, and by late-February, 10,000
users had registered for the website. Zuckerberg said:
At Harvard, a few of my friends saw me developing Facebook, and they sent it
out to a couple of their friends, and within two weeks two-thirds of Harvard was
using it. Then, we started getting e-mails from people at other schools asking,
How do we get Facebook? Could you license us the code so we could run a
version of Facebook for our school? But when I started it, there was no concept
of having Facebook across schools.
Nevertheless, by early March 2004, Facebook had launched at Yale, Columbia, and Stanford.
Zuckerberg said:
We started with the schools at which we thought the people at Harvard were most
likely to have a lot of friends. We decided that those were Yale, Columbia, and
Stanford. It was not really scientific; it was just intuition and probably wrong.
At Stanford, half or two-thirds of the school joined Facebook in the first week or
two. At Yale, there was a similar story. Columbias community, on the other
hand, was a little more penetrated by an existing application, and Facebook didnt
pick up right away. A little later, when we launched at Dartmouth, half the school
signed up in one night.

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By June 2004, Facebook was serving about 30 colleges and had about 150,000 registered users.4
Before long, Zuckerberg was so busy maintaining the website that he could not keep up with his
studies. Consequently, he called upon his two roommates Dustin Moskovitz and Chris Hughes
for help, and together the trio spent the rest of the 2004 school year trying to respond to the flood
of demand for the service from students on college campuses nationwide. Zuckerberg said:
Early on, we werent intending this to be a company. We had no cash to run it.
We actually operated it for the first three months for $85 a monththe cost of
renting one server. We had a network of banner ads, but its not like we were
making money.
Zuckerberg and Moskovitz agreed to spend the summer of 2004 in Silicon Valley because they
had friends doing internships in the area, and also because this was a place that a lot of startups
had been from, and it seemed like a pretty fun place to be and someplace that it made sense for
us to be at some point in our lives, Zuckerberg said. Indeed, Facebook already had been a hit
on the Bay Area scene, having raced through Stanford a few months earlier. Moreover, similar
services had already been received with the local stamp of approval: venture capital funding and
a jargon classification; Facebook and a large stable of online communities became known as
social networking websites.
INDUSTRY OVERVIEW
Social Networking Websites
Early entrants
Websites designed explicitly for the creation and discovery of social networks have been in
existence since the late 1990s. In January 1997, SixDegrees.com was founded by Andrew
Weinreich in New York City. The online service asked users to create a list of friends, family
members, and acquaintances and allowed users to send messages and post bulletin board items to
people in their first, second, and third degrees. In December 2000, the website had almost three
million registered users in over 165 countries and was acquired by YouthStream Media
Networks in a stock transaction valued at approximately $125 million. 5 Weinreich said:
From the beginning, our vision has been to create a vibrant, growing online
community of members who are able to leverage the power of their relationships
in a way that was never before possible. Over the last three years, we have been
able to make this vision a reality for nearly three million members through our
viral growth engine.
However, after the stock market plunged in the early 2000s, many technology companies
struggled to stay in business. In October 2002, YouthStream received a delisting notice from
NASDAQ because it did not comply with either its minimum $2 million net tangible asset
4

Ellen Rosen, Students Start-up Draws Attention and $13 Million, the New York Times, May 26, 2005.
Hannah Swift, YouthStream Acquires sixdegrees in $125 Million Deal, Creating Web's Largest Community
Targeted to Young Adults and College Students, Business Wire, December 15, 1999.
5

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requirement or the alternative minimum $2.5 million stockholders' equity requirement.6 In the
end, SixDegrees.com failed to get traction after 2000.
Communications services
Other web services were developed in the late 1990s to enable communications across social
networks. In January 1997, Scott Hassan started an e-mail archiving service called FindMail
which later became eGroups. eGroups enabled e-mail group communications through mailing
lists; each group also had a shared calendar, file space, group chat, and a simple database. In
August 2000, the company had 18 million users and was purchased by Yahoo! Inc. for $432
million in a stock deal and became part of Yahoo! Groups.
In 1996, an Israeli-based start-up created an instant messaging program called ICQ that enabled
rapid communications between buddies. The tool became wildly popular and was acquired by
AOL in 1998 for $287 million. In 1998, Evite launched to become a successful social-planning
website for creating, sending, and managing online invitations.
Business and professional services
In 2003, Spoke Software, ZeroDegrees, Visible Path, Contact Network, and a number of other
companies raised venture capital to help facilitate the creation of online business and
professional networks. In November 2003, LinkedIn raised $4.7 million in a series A financing
led by Sequoia Capital. LinkedIn CEO Reid Hoffman said:
We are very pleased with the rapid adoption of LinkedIn among hiring managers,
venture capitalists and executives from public companies in a broad set of
industries. It is particularly gratifying to see that it took less than two months for
LinkedIn to help hiring managers not only reach top talent through referrals, but
also interview and hire them.7
Recreational services
In the early 2000s, a flood of web services were formed to create recreational social networks.
In 2002, Jonathan Abrams founded Friendster, and it became a prominent dating website.
Friendster asked users to create an online presence by filling out a questionnaire profile and
uploading a user picture, and then defining a pool of friends. In September 2003, the site
attracted 1.5 million unique visitors, up from 110,000 in April 2003. In October 2003, the
company rejected a $30 million buyout offer from Google and instead raised $13 million in
second-round financing led by venture firms Kleiner Perkins Caufield & Byers and Benchmark
Capital.8 They're obviously growing by leaps and bounds and spending no money on
marketing. That they're using very powerful human relationships to connect is really at the core
of what makes this for me quite compelling," said board member John Doerr. 9
6

Kellie Houston, YouthStream Media Networks Receives Nasdaq Delisting Notification; Company Plans to
Appeal, Business Wire, October 25, 2002.
7
Konstantin Guericke, Sequoia Capital ``Links In'' with $4.7 Million Investment, November 12, 2003.
8
Matt Marshall, Sunnyvale, Calif.-Based Online Dating Site Rejects $30 Million Google Offer, San Jose
Mercury, October 31, 2003.
9
Ann Grimes, Powerful Connections, Social-Networking Web Sites Attract Venture Capitalists, Evoking
Memories of 1999, Wall Street Journal, October 30, 2003.

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In July 2003, Chris DeWolfe and Tom Anderson founded MySpace, which is described on the
website as an online community that lets you meet your friends' friends. In addition to its
basic social networking service, MySpace also incorporated a wide-range of features into its
platform, including groups, invitations, events, classifieds, and forums. However, the Los
Angeles-based start-up became mostly known as a combination dating and music discovery
destination, featuring music streams and downloads from both unsigned artists and major label
acts like Weezer and REM. In December 2004, the company raised $11 million from Redpoint
Ventures.10
Another prominent recreational social network was launched by the Internet juggernaut Google.
Started by a Turkish-born Google software engineer in January 2004, the social network called
Orkut restricted membership to invitation-only (only existing members could invite new users to
the network). By the end of July 2004, the site had over one million members, and by the end of
September, it had surpassed the two million mark. In November 2004, over 62 percent of
Orkuts users listed Brazil as their country of residence.11
FACEBOOK COMPANY OVERVIEW
In 2004, Facebook was a free service and accessible to anyone with a .edu e-mail account,
which limited its use mostly to college students. Members of the network were encouraged to
create a personal profile including contact information (e.g., phone number, address, instant
messenger ID, and e-mail address), interests, and current course schedule. (See Exhibit 1 for a
sample Facebook profile). Zuckerberg said:
Its essentially an online directory for students where [they] can go and look up
other people and find relevant information about themeverything from what
theyre interested in, to their contact information, what courses theyre taking,
who they know, who their friends are, what people say about them, what photos
they have. I guess its mostly a utility for people to figure out just whats going
on in their friends lives, [and those] people they care about.
Unlike Friendster and MySpace, where divisions between various networks were not explicit,
Facebook made its members school their primary network and offered only limited access
beyond that. "What makes it so much better than Friendster is that it's your peers rather than a
random assortment of people," said Sarah Williams, a freshman at Berklee School of Music in
Boston.12 On Facebooks customer support page, it read:
Facebook was intentionally designed to limit the availability of your profile to
only your friends and other students at your school. This simple but important
security measure promotes local networking and makes sure that your information
is seen by people you want to share it with, and not seen by folks you don't.
10

Matt Meyerhoff, Intermix, Unit Attract Funding, Los Angeles Business Journal, December 13, 2004.
Verne Kopytoff, Google's Orkut puzzles experts, San Francisco Chronicle, November 29, 2004.
12
Om Malik, Scoring a Hit with the Student Body, Business 2.0, June 2005.
11

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Additionally, Facebook put its members in charge of their own privacy settings. In some cases,
members allowed only their friends to view their profile on the website. However, Facebooks
default setting was more open: everyone at a members school could see their profile. (See
Exhibit 2 for Facebook principles related to privacy). Zuckerberg said:
Were not asking anyone to put anything out there that they wouldnt be
comfortable putting out there. Were not forcing anyone to publicize any
information about themselves. We give people pretty good control over their
privacy.
Despite his companys similarities to other so-called social networking sites, Zuckerberg did not
believe that the term was accurate for describing Facebook. He said:
The use of [Facebook] is definitely aided by . . . friends and people around you
using it. But I think that its a utility and something that people use in their daily
lives to look people up and find information about [them]. . . . In that way, maybe
theres some form of networking going on.
Friendster, MySpace, and Facebook are all very different things, but you can
apply the [term] social network to them because they have this model of having
friends sending invitations [to friends]. I think that they all kind of use it to
achieve the same result, which is getting people to come to the site . . . but then
they kind of parlay that into different uses.
We have this directory utility. Friendster was a dating site. Facebook does not, in
any way, aim to be a dating site, even though maybe some of that goes on.
On the other hand, Facebook shared a number of features with MySpace, including some of the
messaging utilities of earlier social communications tools (e.g., e-mail, groups, invitations,
events), sharing utilities between friends, and, yes, even some dating. (See Exhibit 3 for a
description of selected Facebook features).
Financing
In the summer 2004, while a flurry of venture financings took place in the social networking
sector, Zuckerberg and a few of his friends lived in a rented house in Palo Alto, CA and worked
on Facebook and also on a file-sharing side venture called Wirehog. The team redesigned and
relaunched Facebook and began adding new servers to host the rapidly growing website.
Meanwhile, Zuckerberg developed a friendship with the 25-year-old Sean Parker, who had cofounded Napster and the online contacts management service Plaxo. Parker began advising the
company informally and, by the end of the summer, he had signed on to become president of
Facebook.
The addition of Parker to the team helped Zuckerberg to secure a number of meetings with
potential investors and entrepreneurs, many of whom were already actively involved with other
social networking companies. In late August 2004, Peter Thiel, a venture capitalist and founder
of PayPal, the online payment service acquired by eBay in 2002, became the companys first

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major investor with a $500,000 cash infusion into Facebook. A few other people have invested
a few thousand dollars here and there, but Im sort of the main investor, pre-venture, said
Thiel.13 Zuckerberg added, When we came out to the Bay Area, we realized that no other site
really had this kind of activity, that it could be a big business, and it might be fun to do.
Only seven months old, Facebook had become something more than just another Zuckerberg
lark. The company now had a widely known entrepreneur on the team and a deep pocketed and
well connected investor. It also had over 200,000 users and an unresolved issue to address:
Should Zuckerberg and his roommates go back to Harvard for their junior year? He said, I
mean, it was never a formal decision, like, should we go back to school? We all just kind of sat
around one day and were like, Were not going back to school, are we? Nah.14 With that
matter put to rest, another one would soon appear: On September 2, 2004, ConnectU.com, an
online meeting place for students, filed a lawsuit in the U.S. District Court of Massachusetts,
charging that Zuckerberg stole the idea and source code for Facebook from them. Facebook staff
and Zuckerberg publicly denied the claim.
Business Model
At the time, Zuckerberg needed Thiels investment to keep the site running. He said, I need
servers just as much as I need food. I could probably go a while without eating, but if we dont
have enough servers then the site is screwed.15 Even though the company had been
experimenting with running advertisements on the site to generate cash flow, revenues were not
keeping up with the increasing costs of hosting Facebook. Nevertheless, Zuckerberg added:
When youre running a site, and youre four people around a kitchen table, your
operating expenses are relatively low. [Now,] we have a very small sales force,
and we sell some ads. . . . By doing that, weve been able to stay cash flow
positive for, basically, the entire existence of the company.
Over time, the company developed three sources of revenues:
- Facebook announcements: Local advertisers could buy text-only advertisements targeted to
specific schools in their geography. Facebook sets prices by school per day, ranging from
$5 to $20 based on the number of impressions.
- Banner advertisements: National advertisers, on the other hand, could purchase graphical
banner advertisements to run across a number of the websites pages.
- Sponsored groups: Companies like Apple and EA paid to sponsor groups, or promotional
areas on the website. On Facebooks customer support page, it read, The money from these
promotions, like the money from all our ads, goes towards the Facebook's server and
operational costs. Sponsored groups help us keep the service free and fast.

13

Constance Loizos, Accel Backs thefacebook.com, Private Equity Week, April 26, 2005.
Kevin J. Feeney, Business, Casual, The Harvard Crimson, February 24, 2005.
15
Ibid.
14

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FACEBOOK 2005: SOPHOMORE YEAR

Additional Financing
By late May 2005, Facebook had attracted 2.8 million registered users on more than 800 college
campuses, which meant that 80 percent of undergraduate students at participating universities
were registered to the website, according to some reports. Meanwhile, a bidding war had broken
out among various top-tier venture capital firms for a piece of the company. "It was probably the
most competitive financing I've ever been involved in," said Parker. "I think we had 30 VCs
who had expressed an interest in the deal."16
The winner: Accel Partners, a Palo Alto-based venture firm, announced a $12.7 million
investment in Facebook at a reported $100 million valuation.17 Accel partner Jim Breyer and
Facebook board member said, It is a business that has seen tremendous underlying organic
growth and the team itself is intellectually honest and breathtakingly brilliant in terms of
understanding the college student experience.18
Parker added, "College students everywhere live and breathe Facebook. Because virtually every
student at schools across the country uses Facebook, the site has become an essential tool for
helping college students manage their social and campus life."
High School
In September 2005, Facebook entered a new market: U.S. high schools. College students who
were registered on Facebook were asked to send invitations to high school students to join the
service; those students could then invite other high school students at their school. Facebook
posted the following message about the high school site on its frequently asked questions page:
The high school and college networks are completely separate. This means that
features like searching, messaging, poking, and inviting people to be friends are
restricted to the network you use. This is primarily for security reasons, but also
because many people prefer it this way.19
The overall high school market was slightly smaller than the overall college market. However,
most users of recreational social networking sites were under the age of 30. In the under 30 age
bracket, there were more high schoolers than college students: in 2004, there were 16.6 million
students enrolled in U.S. high schools under the age of 30 compared to only 13.2 million
students enrolled in U.S. colleges under 30. (See Exhibits 4 & 5 for school enrollment
statistics). Zuckerberg added:
16

Mark Boslet, Venture Capital Returns to the Web, The Wall Street Journal, July 27, 2005.
Gary Rivlin, Billion-Dollar Baby Dot-Coms? Uh-Oh, Not Again, The New York Times, September 2, 2005.
18
Ellen Rosen, Students Start-Up Draws Attention and $13 million, The New York Times, May 26, 2005.
19
Facebooks response the question, What is poking? on its frequently asked questions page was: We have about
as much of an idea as you do. We thought it would be fun to make a feature that had no real purpose and to see
what happens from there. So mess around with it, because you're not getting an explanation from us.
17

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Launching a high school product . . . was something that we could do really

quickly, and the high school model was very similar to the college model that we
had. And there are more high school students than college students, and it just
seemed like a very effective use of our time.
Sure enough, the high school market was eager to adopt Facebook. Zuckerberg said:
The high school network reached a million users way faster than the college
network did. The college network took almost 11 months to reach a million, and
the high school took only six or seven months.
However, there were two complications. First, entering the high school market elevated the
stakes surrounding the security and privacy issues (perceived or otherwise) that had plagued
social networking sites for years. Second, MySpace had beaten them to the high school market
and was rapidly gaining a strong foothold in schools around the country.
Security and Privacy
In 2005, various media outlets offered condemning reports on social networking sites on a
variety of privacy and security topics. Newspaper and magazine reporters across the country
warned that students posting their phone number or home address (and on Facebook, their
specific whereabouts) were opening themselves up for danger. Even the students themselves
complained about how the websites were being abused. College newspapers reported that
employers were screening the Facebook and MySpace profiles of job applicants. High school
students feared that college admissions staff were monitoring the websites. Such intrusions were
viewed as violations by students, some of whom offered evidence of underage drinking or illegal
drug use on their profiles. Breyer said:
In many ways, I think our challengefrom a business perspective and a usage
standpointwould be similar to how eBay evolved. We certainly spend a lot of
time thinking about what are the privacy issues . . . We think medium and long
term about privacy issues, security issues, and perhaps the closest model out
there, in my view, would be how eBay had to make some fundamental decisions
along the way relative to the democratization, if you will, of their user base.
Indeed, whether or not there were actual security and privacy breaches on Facebook, media
stories on these topics proliferated, and the company was on high alert. Like MySpace,
Facebook took a variety of proactive measures to protect its members, such as using technology
to crawl the site for fake profiles. Nevertheless, an inherent tension existed: on the one side,
parents, school administrators, and law enforcement officials were, justifiably, encouraging
students to err on the side of caution and reveal very little about themselves. On the other side,
Zuckerberg and Facebook had built a directory utility that became more useful to its members
the more they revealed about themselves. Consequently, Facebook was architected to enable, in
Zuckerbergs words, a freer flow of information. He added:
Our mission is to increase information flow between people and to help people
learn whats going on in their world and express themselves.

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People use Facebook because the good far outweighs the bad. People realize that
if they put their information up there, certain people are going to be able to see it.
Thats why you have more than a third of Facebook users putting up their cell
phone numbers. On Facebook, people make this information available, and then
are able to get this information from other people, and then are able to express
themselves about what they are into. This turns out to be a pretty valuable thing,
and thats why people spend a lot of time on the site. Theyre just trying to
understand whats going on in their world.
There is some negative information flow in there, and I feel thats what people are
reacting to, but its a minority. But theres also a lot of confusion, and especially
with all this press now about safety issues on MySpace. People use Facebook
differently and we view our site differently: we view ourselves as a utility instead
of a media property. Some of the safety concerns about MySpace just arent
really relevant on Facebook.
Clearly, Facebook management would be loath to censor its members, or even place restrictions
on their ability to express themselves. Further, Zuckerberg knew that too much institutional
influence on Facebook would be met by user backlash. However, the company was in the
media spotlight, and Breyer was not about to let Facebooks management take a cavalier attitude
towards these sensitive matters. Even though he had called the 21-year-old Zuckerberg very
much the long-term CEO, Breyer advised him to hire seasoned senior management talent.
Whether the Facebook management team would be adding more experienced members was not
questioned (they would be); how the introduction of older executives (who were long since
removed from college) to the mix would impact the website was.
Organization
By April 2006, the Facebook organization had grown to over 100 employees, and most were
located in a single office in Palo Alto, CA. The management team consisted of Zuckerberg
(CEO), Moskovitz (CTO), Owen Van Natta (COO), and Matt Cohler (VP of strategy and
business operations). Both Van Natta and Cohler joined Facebook from executive roles in
Internet companies: Van Natta from Internet commerce giant Amazon and Cohler from
LinkedIn. Parker left the company to pursue other opportunities, and Hughes remained company
spokesperson. Naturally, work processes within the company were also evolving. Zuckerberg
said:
[Early on], it was me and my roommate, Dustin, just sitting there working serially
on one project; and then finishing it, and then planning . . . and then doing the
next project . . . but trying to figure out how to manage the transition from doing
that . . . to thinking at a higher level about how the landscape is playing out and in
terms ofyou need to not only have engineers who can directly work on the
product that youre working on, but then you need to start having a finance
department

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In order to fulfill its organizational growth plans, the company leaned on Breyer for assistance in
building out its management team and also conducted recruiting events at universities like
Stanford and Harvard in late 2005 to build out its engineering team. Zuckerberg said:
I think that the two most important things that I look for are . . . one is just raw
intelligence. The second is just alignment with what were trying to do . . . the
best people who Ive hired so far have been people who didnt really have that
much engineering experience. I hired a couple of electrical engineers out of
Stanford to do programming stuff, and theyve had very little programming
experience going in, but [they were] just really smart, and really willing to go at
it.
Despite the rapid growth in size of the organization, Zuckerberg aimed to instill a culture of
experimentation at Facebook. He said:
The Facebook organization is relatively flat, organic. I have found that you dont
want to prescribe too much ahead of time because then youre kind of locked into
stuff. For example, if you put someone in charge of local, that means youre
building a local product, whether its the right time to build a local product or
its the right thing to be allocating your resources against. If you have a highpowered, high-level person in charge of local, you are building something
local.
We try to let people like grow stuff that they think is good, and then we have
some top-down strategic direction that we provide. There are a few priorities, and
then theres a lot of experimentation.
Alumni Market
Naturally, one priority for Facebooks management team was attracting the alumni market.
Zuckerberg said:
We have natural growth built into our system in that over 3 million people leave
high school and enroll in college every year. Last year, we had somewhere
between 700,000 and 800,000 seniors graduate from college and are now alums
on the site. About 45 percent of that group still returns to Facebook each day. So
even if you take out the college part of the site, this is probably still the stickiest
site on the web.
At the end of this school year, were going to have a group of seniors graduate
who have been on Facebook for two years. Instead of just saying well let you on
if have an alumni e-mail address, we might try to do something more proactive to
get them on the site.

Facebook E-220

p. 13

Additional Growth Opportunities

Facebooks management was also exploring a number of other strategic growth opportunities.
First, Facebook was not available at most colleges outside of the U.S.; other than a few
prominent English-speaking schools in the United Kingdom and Canada, Facebook was largely a
U.S. phenomenon. Zuckerberg added:
Ive been sort of hesitant in terms of expanding outside of the U.S. We have a
bunch of colleges, like Oxford and Cambridge, [already on Facebook]. There are
large populations of colleges in countries like China, but Im not quite sure
whether the culture around universities there is similar enough such that the same
application works. Localization is definitely necessarily. They speak a different
language, so wed need to have the application in that language in order to have it
be relevant . . .
I think that it might be pretty relevant, but it requires some thought about what
those specific cultures are and maybe the density of students in those cultures . . .
I think that, as time goes on, well definitely invest the time and resources into
[growing internationally].
Second, Facebook management was evaluating possible avenues for expansion of the technology
into new areas. One idea was to license the Facebook platform to other groups and institutions to
develop their own Facebooks. For example, community groups or membership clubs could
create their own social networks using the Facebook platform and set the rules for the service;
and Facebook could collect a licensing fee. Another opportunity was to open up the Facebook
platform for third-party development. For example, if Facebook users wanted to share videos
and they did not want to have to wait until the companys engineering resources could develop
an application of this nature, a more open technology architecture would enable enterprising
third-party engineers to fill these needs.
Finally, Facebook management was committed to improving its existing directory utility for its
core user base. With its horizontal application, Facebook needed to ensure that the breadth of
what it offered (a wide-range of features) and its overall user experience were satisfactory. First
and foremost, the site needed to be lightning fast to hold the attention span of its young audience,
which meant that Facebooks technical infrastructure needed to be able to scale to support
massive usage growth. Second, Facebook needed to fully address the growing security and
privacy issues. Third, its offering needed to be more appealing to its users than an evolving list
of competitors.
Competition
MySpace, for its part, was growing at a rapid clip. According to comScore Media Metrix,
MySpace.com had become the fifth most popular website by number of page views. It had also
grown as music destination to include more than 350,000 bands and artists. On July 18, 2005,
the multinational media conglomerate News Corporation announced that it would acquire
MySpaces parent company Intermix Media, Inc. for approximately $580 million in cash. (See
Exhibit 6 for a copy of the press release). In October 2005, MySpace.com had 24.3 million

Facebook E-220

p. 14

unique visitors to the site, up from 3.4 million in October 2004, an increase of more than 600
percent.20
By contrast, Friendster had only 1.4 million unique visitors in October 2005, down from a high
of 1.75 million in October 2003.21 Notwithstanding the challenges it faced competing with other
dating websites, Friendster had technical scalability issues, and users often paid the price by
having to endure slow response times from the website. In October 2005, Friendster launched a
redesigned site with expanded features, such as more file-sharing capabilities for all media types
(music, photos, and videos). Taek Kwon, Friendsters fourth CEO in less than four years, said,
"In the beginning, social networking was a way to connect with friends and having online
references. But now that's not enough." In December 2005, CNET reported that Friendster had
hired the investment bank Montgomery & Co. to explore selling the company.22
Even though Friendster appeared to be marginalized in 2005, competitive threats to Facebook
loomed every where. First, the venture industry showed no signs of backing away from
consumer Internet investments with network benefits. By late 2005, the terms social software
and web 2.0 were used to describe a flood of venture funded start-ups, many of which had
consumer-sharing features and were targeted at the under-30 demographic. (See Exhibit 7 for a
comparison of selected social networking websites). Second, many of the technology industry
heavyweights were spending aggressively on social applications: Google (e.g., Blogger, Picasa,
Google Talk and Video), Yahoo! (e.g., del.icio.us, flickr), eBay (e.g., Craigslist, Skype), and
AOL (e.g., instant messaging enhancements). Finally, and more directly, Facebook-like
directory utilities were popping up everywhere (e.g., Bebo in the U.K. and Ireland, Tagged.com
for teens in the U.S., and Xuqa in the college market).
Success
Competitive issues aside, Facebook had become an extraordinary phenomenon. Its user base
was growing at an impressive rate: from ~5.0 million users in late October 2005 to over 7.5
million in mid April 2006, when Facebook was available in over 2,100 colleges and over 22,000
high schools. Even more impressive, however, were the usage patterns on Facebook.
Zuckerberg said:
On a normal day, about two-thirds of our total user base comes back to the site. A
lot of sites measure monthly retention, and if you have 25 percent (monthly
retention), you are doing really well. I dont know any other site that measures
their retention in daily retention. Facebook is a clearly different type of
application. Perhaps, e-mailamong people who use computers a lothas that
amount of retention or frequency of use.

20

Jessica Mintz, Friendsters Eww Moment, The Wall Street Journal, December 8, 2005.
Jennifer Saranow, Year In Technology 2003: Evolving Social Circles, The Wall Street Journal Online,
December 11, 2003.
22
Brian Deagon, Once Hot, Friendster May Be Seeking A Buyer, Investors Business Daily, December 7, 2005.
21

Facebook E-220

p. 15

Apparently Facebook is the number one photo-sharing website on the Internet.

We arent a photo website. We just have the most photos that people look at
somewhere between two and three billion photos.
MySpace has like 70 million users nowten times as many users as we have.
But we are so much more frequently used that I think they only get three times as
many people coming to their site each day, or maybe its not even that much. So
its going to be a lot easier for us to go from 7 million to 14 million or 20 million,
than it is for them to go from 70 million to 140 million. Just by having an
application that provides more utility, I dont actually think were in a bad
position against them or any of these other guys.
Sure, we have observed different growth patterns at our schools. Our biggest
school is Penn State, and it has more than 60,000 people. A number of high
schools, on the other hand, have just a few hundred students. The smaller schools
are easier to hit critical mass. But we havent seen any cases in which Facebook
isnt really working. Even commuter schools, where we are getting a lower
percentage of the population, we end up with phenomenal retention rates: between
45 and 75 percent for almost every school.
But, Why?
Notwithstanding such performance, Zuckerberg built Facebooks principal architecture in a
couple weeks when he was a college sophomore. Naturally, there was rampant debate about
what was so unique about Facebook and how it came to be so widely used.
This wasnt played out as a well-controlled experiment. I initially launched it at
Harvard because I wanted the service. In fact, a lot of the functionality in the
service that I thought was necessary is not really. For example, users can only see
the people who are either in their school or their network. The reason for that is
you want to be able to get access to the information and share your information to
those people, but you dont necessarily want to share information with everyone.
One interesting thing about the expansion is that we were always over-subscribed
on demand for the service versus what we could provide. It would have been
interesting to see how it played out if we had just come out in February of 04 and
launched a site where every school was on it. It might have ended up being the
same; I dont know.
Exit
Meanwhile, the capital markets were hungry for businesses with economics similar to the top
performers in the social networking sector. Many argued that MySpace had sold out for too low
of a price (one of its founders even filed a lawsuit making this claim), and that Accels
investment in Facebook at a $100 million valuation was a steal. Indeed, Facebooks valuation
was a topic of much debate on March 28, 2006, when BusinessWeek Online reported that
Facebook had rejected a $750 million buyout offer and was looking for as much as $2 billion in a

Facebook E-220

p. 16

sale.23 Kevin Efrusy, venture capitalist with Facebook investor Accel Partners responded to the
reported acquisition offer saying, Does [Facebook] have the potential to be worth more than $2
billion, based on economic fundamentals and the value of its audience? Absolutely.24 Others
argued that at its revenue run-rate, Facebooks reported valuations were unsupported by rational
financial models. Zuckerberg said:
We are going to be measured by the amount of money we make, so thats an
important thing for us. But I think its important to think about what stage of the
business were at, and weve really only been around for a little more than two
years. At this point, a lot of businesses might just be coming to market with their
products.
Were in this interesting paradox, where on the one hand we are the number seven
most trafficked site on the Internet according to comScore Media Metrix. The
other top sites are all multi-billion dollar media companies, or in the case of
MySpace, just owned by one. On the other hand, we are just a 100-person startup that isnt quite sure of everything yet, but really shouldnt be, given our age
and the maturity of the organization.
We want to be making money, and we will be making money. Were testing a
bunch of stuff. I can tell you what I think will be good revenue streams. But at
this point, theyre so young that its not going to help anything. Companies want
to give us huge valuations. But on the other hand, we dont have the revenues to
support that, but were not asking anyone to come in and to fix that either. Its
not really where we are right now. But revenue is scaling much faster than we
expected.
On April 19, 2006, Facebook ended the medias speculation about its potential buyout, when it
announced the closing of its third round of financing. Greylock Partners led the $25 million
fundraising, while Meritech Capital Partners and Facebook's existing investors Accel Partners
and Peter Thiel also participated. Zuckerberg said:
We're building this company for the long term and this funding validates the
viability of our business. We're still in the early stages of building Facebook.
We're constantly developing new functionality to make Facebook more useful and
this funding will help accelerate our development efforts.25

23

Steve Rosenbush, Facebooks on the Block, BusinessWeek Online, March 28, 2006.
Rebecca Buckman, Web-Networking Service Facebook Exploring Partnerships, Buyout, Wall Street Journal,
April 3, 2006.
25
Melanie Deitch, Facebook Secures $25 million investment, Company Release, April 19, 2006.
24

Facebook E-220

p. 17

Exhibit 1
Sample Facebook Profile
Dustin Moskovitz, founder and CTO

Facebook E-220

p. 18

Exhibit 2
Facebook Principles
We built Facebook to make it easy to share information with your friends and people around
you. We understand you may not want everyone in the world to have the information you share
on Facebook; that is why we give you control of your information. Our default privacy settings
limit the information displayed in your profile to your school, your specified local area, and other
reasonable community limitations that we tell you about.
Facebook follows two core principles:
1. You should have control over your personal information.
Facebook helps you share information with your friends and people around you. You choose
what information you put in your profile, including contact and personal information, pictures,
interests and groups you join. And you control with whom you share that information through
the privacy settings on the My Privacy page.
2. You should have access to the information others want to share.
There is an increasing amount of information available out there, and you may want to know
what relates to you, your friends, and people around you. We want to help you easily get that
information.
Sharing information should be easy. And we want to provide you with the privacy tools
necessary to control how and with whom you share that information. If you have questions or
ideas, please send them to [email protected].
Source: Facebooks Privacy Policy page.

Facebook E-220

p. 19

Exhibit 3
Selected Facebook Website Features
Friends
You can invite anyone that you can see on the network to be your friend. Just use the "Search"
page to find people you know and then click on the "Add to Friends" button on the right side of
the screen. A friend request will be sent to that person. Once they confirm that they actually are
friends with you, they will show up in your friends list.
Messaging and Poking
Communicating with other other people on Facebook is easy:
1. You can choose to send a message while viewing someone's profile by selecting the "Send a
Message" button under their profile picture. This option is also available from the right side
of any search results screen.
2. Once you call up the message box, just type a subject and message and click "send." The
person you are messaging will be notified the next time they login.
Social Timeline
Social Timeline breaks down the different ways you have interacted with your friends over the
course of your life. All the information displayed comes from the friend details you have listed.
To add more details, simply go to the My Friends page and fill out the fields for "How you know
someone."
Wall
Your wall is a forum for your friends to post comments or insights about you. You can always
remove comments you don't like from your own wall. If you want your wall turned off, you can
do that on the My Privacy Page.
Pulse
Pulse uses information provided in Facebook profiles to show the most popular listings and the
latest trends on the network.
Groups
You can join any public group at your school. Just search or browse groups (from the Search
page) and click on the "join group" on the right side of the screen. Some groups require
administrative approval for you to join. If you try to join these groups, you will have to wait for
an admin to let you in. Finally, there are some groups on Facebook that are invitation only. You
cannot request to join these. Only an invitation from a group admin will give you access.
Events
Looking for something to do? You can hunt for events from the Events tab of the Search Page.
This page also allows you to browse upcoming events. Browsing will pull up ten random events
that are scheduled for a future date. The browse option is also available from the "My Events"
page.
Source: Facebook customer support pages.

Facebook E-220

p. 20

Exhibit 4
School Enrollment Statistics, By Age and Level
(in thousands)
Nursery or
High
kindergarten Elementary school College
.3 and 4 years old
4,552
.5 and 6 years old
4,136
3,425
.7 to 9 years old
44
11,466
.10 to 13 years old
16,237
259
.14 and 15 years old
1,347 6,971
8
.16 and 17 years old
34 7,862
190
.18 and 19 years old
10 1,266 3,685
.20 and 21 years old
1
126 3,777
.22 to 24 years old
1
72 3,149
.25 to 29 years old
11
65 2,403
.30 to 34 years old
6
28 1,287
.35 to 44 years old
11
67 1,615
.45 to 54 years old
6
49
924
.55 years old and over
1
25
345
.Total
8,731
32,556 16,791 17,383

Total
4,552
7,561
11,510
16,496
8,327
8,086
4,961
3,904
3,221
2,479
1,321
1,692
979
371
75,461

Source: U.S. Census Bureau, Current Population Survey, October 2004

Exhibit 5
College Enrollment Statistics, By Age and Level
(in thousands)
Year enrolled in college

15 to 19 years old
20 to 24 years old
25 to 34 years old
35 years old and over
Total

Total enrolled 1st

3,883 2,364
6,926 795
3,690 560
2,884 431
17,383 4,150

2nd 3rd
4th
5th
1,260 231
8
20
1,507 1,970 1,859 400
582 540 574 555
458 549 315 350
3,807 3,291 2,757 1,324

Two-year college Four-year college

6th or 1st and 3rd and 1st and 3rd and Graduate
higher 2nd year 4th year 2nd year 4th year school
1,219
24
2,405
215
20
395
1,051
320
1,251 3,510
795
878
697
201
445
914
1,433
781
585
244
304
620
1,131
2,054
3,552
788
4,404 5,260
3,378

Source: U.S. Census Bureau, Current Population Survey, October 2004

Facebook E-220

p. 21

Exhibit 6
News Corporation Press Release
News Corporation to Acquire Intermix Media, Inc.
Acquisition Includes Worlds Fastest-Growing Social Networking Portal, MySpace.com
Intermixs network of sites to join newly formed Fox Interactive Media
LOS ANGELES, CA, July 18, 2005 - News Corporation announced today that it signed a definitive agreement to
acquire Intermix Media, Inc. for approximately $580 million in cash, or the equivalent of $12 per common share. In
a separate transaction, Intermix announced today that it exercised its option to acquire the 47 percent of
MySpace.com that it does not already own. MySpace.com is the leading lifestyle portal for networking online. Both
MySpace.com and Intermixs more than 30 sites will become part of News Corporations newly formed Fox
Interactive Media unit.
The acquisition of Intermix, combined with the recently announced formation of Fox Interactive Media, underscores
News Corporations commitment to expand its internet presence by offering a deeper, richer online experience for
its millions of users.
With the addition of MySpace,and Intermixs network of sites, News Corporations U.S. web traffic will nearly
double to more than 45 million unique monthly users, putting the Company in the top echelon of most trafficked
content sites on the Internet today. The Intermix network of sites is the largest multi-category online entertainment
network with more than 27 million unique monthly users. Intermixs group of entertainment, humor, gaming and
social networking sites has become the leading network for shareable digital entertainment such as pictures, music
and video.
Launched less than two years ago, MySpace.com is the fifth ranked web domain in terms of page views according to
comScore Media Metrix.* Integrating web profiles, blogs, instant messaging, e-mail, music downloads, photo
galleries, classified listings, events, groups, chatrooms, and user forums, MySpace.com has created a connected
community where users put their lives online. As a result, MySpace.com is a favorite with online advertisers in
June the site served more than 8 percent of all ads on the Internet, putting it in the company of Web giants Yahoo!,
Google and AOL. It has also become a key music destination, with more than 350,000 bands and artists including
REM, the Black Eyed Peas and Weezer having used the site to launch new albums and enable users to sample and
share songs.
One of Intermixs popular web sites is grab.com, a premier gaming and entertainment site that integrates social
networking, community features, and viral entertainment. Intermix augments its content properties through its
analytical optimization e-commerce division Alena.
"Intermix is an important acquisition for News Corp., instantly doubling the number of visitors to our sites and
providing an ideal foundation on which to meaningfully increase our internet presence," said News Corporation's
Chairman and Chief Executive Officer, Rupert Murdoch. "Intermix's brands, such as MySpace.com, are some of the
web's hottest properties and resonate with the same audiences that are most attracted to Fox's news, sports and
entertainment offerings. We see a great opportunity to combine the popularity of Intermix's sites, particularly
MySpace, with our existing online assets to provide a richer experience for today's internet users."
The transaction is expected to close in the 4th quarter of calendar 2005. The transaction is subject to certain
customary conditions including approval of the Intermix common and preferred stockholders.
In a related transaction, News Corporation announced that it entered into a voting agreement with VantagePoint
Venture Partners, the largest stockholder of Intermix. The agreement provides that VantagePoint will vote its shares,
representing approximately 22.4 percent of the outstanding shares of Intermix, in favor of the transaction.

Facebook E-220

p. 22

We are very excited to combine our unique Internet reach and assets with one of the most exciting media
companies in the world. We look forward to continuing to lead the market in unique content, social networking, and
analytical marketing, said Richard Rosenblatt, Intermix Medias CEO.
Mr. Rosenblatt and MySpace CEO, Chris DeWolfe will continue in their roles following the completion of the
acquisition. Messrs. Rosenblatt and DeWolfe will join Fox Interactive Media, led by Ross Levinsohn.
ABOUT NEWS CORPORATION
News Corporation (NYSE: NWS, NWS.A; ASX: NWS, NWSLV) had total assets as of March 31, 2005 of
approximately US$56 billion and total annual revenues of approximately US$23 billion. News Corporation is a
diversified international media and entertainment company with operations in eight industry segments: filmed
entertainment; television; cable network programming; direct broadcast satellite television; magazines and inserts;
newspapers; book publishing; and other. The activities of News Corporation are conducted principally in the United
States, Continental Europe, the United Kingdom, Australia, Asia and the Pacific Basin.
ABOUT INTERMIX
A leading online media and ecommerce enterprise, Intermix Media (Amex: MIX) and its subsidiaries utilize
proprietary technologies and analytical marketing to develop unique content, an active community and innovative
ecommerce offerings. The Intermix Network blends user-generated and proprietary online content to motivate its
users to spend more time on its Network and to invite their friends to join them. By integrating social networking
applications, self-publishing and viral marketing, the Intermix Network has grown to over 27 million unique visitors
per month. Intermix also leverages its optimization technologies, marketing methodologies and the Internet through
its Alena unit, where it launches branded consumer product offerings. Alena expands Intermix's consumer reach by
marketing select high margin and innovative products directly to the consumer across the Internet. In doing so,
Alena cost-effectively builds consumer brands and drives new users back to the Intermix Network.

Facebook E-220

p. 23

Exhibit 7
Comparison of Selected Social Networking Websites
Name

Launch Date
Registered Users
Signups per day

Jul-05
23 million
35,000

Facebook
U.S. college and
high school
markets
Feb-04
7.4 million
Not reported

Page views per month

(U.S., February)
Unique visitors per
month (U.S.,
February)
Average minutes per
visitor (U.S.,
February)
Employees

230 million

Description

Funding

Bebo
Popular in the
U.K. and Ireland

MySpace
U.S. market
leader

myYearbook

Sconex

Tagged

TagWorld

Xuqa

Started by two Targeting high Allows only U.S. Music discovery

College market
high school kids school students
teens
tool

Jan-04
67 million
250,000

Apr-05
600,000
4,500-6,000

Jan-05
500,000
4,000-5,000

Oct-04
2.5 million
10,000

Nov-05
1.3 million
15,000-20,000

Sep-05
550,000
5,000

5.5 billion

23.6 billion

55 million

1.1 billion

354 million

14 million

Not measured

1.2 million

10.5 million

37 million

2.7 million

439,000

1.7 million

3.2 million

Not measured

21.5 minutes

15 minutes

29.5 minutes

10 minutes

27 minutes

25 minutes

17 minutes

5 minutes

100

Bootstrapped

280
Parent Intermix
bought by News
Corp in July
2005

$12.7 million
from Accel
Partners

Source: Red Herring, April 17, 2006.

$1.5 million
from angels

12
35
60
19
$1.3 million
Bought for $8.7
$8.5 million
$7.5 million
from Bessemer
million by Alloy from Mayfield,
from Draper
Venture
in March 2006
angels
Fisher Jurvetson
Parteners, angels